U.S. bond yields experienced an upward movement on Thursday as investors digested remarks made by Federal Reserve Chair Jerome Powell and anticipated the release of January jobs data in the coming days.
Yield Movement Highlights
- The yield on the 2-year Treasury BX:TMUBMUSD02Y climbed by 4.1 basis points to 4.250%. (Yields move inversely to prices.)
- The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 2.9 basis points to 3.948%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y added 1.9 basis points to 4.192%.
Factors Behind Market Trends
Investors pushed back their expectations for the Federal Reserve’s first interest rate cut in 2024. However, they still anticipate the central bank to lower borrowing costs by approximately 150 basis points this year.
Following the decision to maintain benchmark interest rates within a range of 5.25% to 5.50% on Wednesday, Fed Chair Jerome Powell stated that reducing borrowing costs at the next scheduled meeting in March was not the most likely scenario.
According to the CME FedWatch tool, the market now prices in a 64.5% probability of the Fed keeping interest rates unchanged in March.
Nonetheless, there is a greater likelihood of at least a 25 basis point rate cut during the subsequent meeting in May, with the probability currently at 93.2%. Additionally, it is expected that the central bank will bring its Fed funds rate target down to around 3.86% by December 2024, as indicated by 30-day Fed Funds futures.
Bank of America’s U.S. economist, Michael Gapen, noted, “The Fed expresses confidence in the outlook but desires ‘greater confidence’ before normalizing its policy stance.”
Greater Confidence in the Economy
As the U.S. economy continues to face challenges, many investors are eagerly waiting for key reports and updates to assess the state of affairs. Notably, experts believe that reducing services inflation and slower wage growth are key factors that will determine greater confidence going forward.
One report that investors will closely watch is the January nonfarm payrolls report, set to be published on Friday. It is anticipated that approximately 185,000 jobs were created during this period. Moreover, there is an expectation that month-on-month wage inflation will decrease from 0.4% to 0.3%.
Before the release of this report, there are several other economic updates scheduled for Thursday. This includes the weekly initial jobless claims report, which will shed light on the current state of unemployment. Additionally, the fourth quarter 2023 productivity report will be released at 8:30 am Eastern Time. At 9:45 am, the final reading of the S&P manufacturing PMI survey for January will be published. Following this, the January ISM manufacturing report, along with December construction spending, is due at 10 am.
In the midst of these developments, concerns about tension in the regional banking sector have also emerged. Shares in New York Community Bancorp (NYCB) experienced a significant decline after the lender highlighted difficulties in commercial real estate. This serves as a reminder that commercial real estate concerns are still prevalent and has contributed to a flight to safety observed in the bond market, according to Stephen Innes, managing partner at SPI Asset Management.
Lastly, the Bank of England is expected to announce its decision on interest rates at 7 am Eastern Time on Thursday. The prevailing expectation is that interest rates will remain unchanged at 5.25%.
With these impactful reports and updates on the horizon, investors are eagerly watching for signs of progress and stability in the economy.
